Chapter 1
Goals and Governance of the
Firm
Topics Covered
 Investment and Financing Decisions
 What is a Corporation?
 Who Is The Financial Manager?
 Goals of the Corporation
The Role of The Financial Manager
 Capital Budgeting Decision

Decision to invest in tangible or intangible
assets.
 …also called the Investment Decision
The Role of The Financial Manager

“Capital Budgeting”
Tangible Assets
Intangible Assets
Toyota Plants
Gillette’s Advertisement
@ $3 billion new debt
@ $200 million
The Role of The Financial Manager
 Financing Decision

The form and amount of financing of a firm’s
investments.
 Capital Structure

The mix of long term debt and equity financing.
The Role of The Financial Manager
(2)
Firm's
operations
Real assets
(1)
Financial
Manager
(4a)
(4b)
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
Investors
Investment
assets
The Role of The Financial Manager
 Real Assets

Assets used to produce goods and services.
 Financial Assets

Financial claims to the income generated by the
firm’s real assets.
What is a Corporation?
 Corporation

A business organized as a separate legal entity
owned by stockholders.
 Types of Corporations
Public Companies
 Private Corporations
 Limited Liability Corporations (LLC)

Who is The Financial Manager?
Chief Financial Officer
Treasurer
Controller
Who is The Financial Manager?
 Chief Financial Officer (CFO)

Oversees the treasurer and controller and sets
overall financial strategy.
 Treasurer

Responsible for financing, cash management, and
relationships with banks and other financial
institutions.
 Controller

Responsible for budgeting, accounting, and taxes.
Goals of The Corporation
 Shareholders desire wealth
maximization
 Do managers maximize shareholder
wealth?
 Mangers have many constituencies
“stakeholders”
 “Agency Problems” represent the
conflict of interest between
management and owners
Agency Problem
Ownership vs. Management
Difference in Information
 Stock prices and returns
 Issues of shares and
other securities
 Dividends
 Financing
Different Objectives
 Managers vs.
stockholders
 Top mgmt vs.
operating mgmt
 Stockholders vs. banks
and lenders
Agency Problem
 Agency Problems

Managers, acting as agents for stockholders, may
act in their own interests rather than maximizing
value.
 Stakeholder

Anyone with a financial interest in the firm.
Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements